Telecom Regulation in 2001 A Year-End Review.

2001 has been a year of change for the telecommunications industry. While the late 1990s were a tremendous boom period for telecom, the early 2000s have been tough for the industry. Telecom stocks have continued to take a beating on Wall Street, losing 70% of their value since the first quarter of 2000. Many competitive local exchange carriers (CLECs) and Internet start-ups have closed their doors or filed for bankruptcy. In addition, many telecom equipment manufacturers, such as Lucent and Cisco, are experiencing serious financial problems.

Change in the industry has been matched by change in the government. George W. Bush, sworn in as president in 2001, brought a new philosophical approach to regulation. Bush is the first president to hold an MBA. He puts heavy emphasis on cost-benefit analysis of government regulation. He advocates a hands-off government that focuses on helping companies meet federal requirements and frowns on federal intervention in markets.

Many analysts and Washington insiders claim that Bush has not shown much interest in high-tech issues and has not acted to aid the faltering high-tech industry. An administration official responded by saying that it is "impossible not to focus on telecom" and pointed out examples of third generation (3G) wireless and broadband deployment initiatives. In addition to spectrum previously identified for next generation 3G services, a new proceeding is underway to identify and allocate additional spectrum for 3G wireless -- one of the top telecom industry priorities, according to the Bush administration.

The administration has been consulting with legislators and industry on the Internet and Broadband Deployment Act (H.R. 1542) currently before Congress. The legislation would ease the regulation of provisioning high-speed data services by Bell operating companies (BOCs). The BOCs contend that passage of the legislation will level the competitive playing field in broadband services and spur deployment of advanced services. Bruce Mehlman, assistant secretary of commerce for technology policy said Bush has not taken a strong stance on the legislation due to the fragmentation of the industry over the bill.

Changes at the FCC 

With a change of administration comes a change in the top federal appointees, and the FCC has been no exception, with four of five commissioners, including the chairmanship, changing hands. In his appointments, President Bush sought out people that share his philosophical view of government regulation.

Bush tapped Commissioner Michael Powell to take the helm of the FCC. President Clinton had appointed Powell a commissioner to the agency in 1997. Powell advocates letting the marketplace set prices and regulate services instead of federal intervention. Consistent with his belief in market regulation, Powell sees the FCC's primary role as being enforcement oriented. One of his first initiatives as chairman was to open a proceeding on ... reorganizing the agency along functional lines instead of industry-specific departments to better position the agency to deal with convergence taking place within the industry.

As head of the FCC, Powell seeks to reduce government regulation, but he also has made moves to strengthen the agency's hand should it need to exercise its enforcement authority. The commission has reduced the accounting requirements for many carriers and continues to look for ways to further "streamline" the amount of reporting required by the agency. Reducing regulatory burdens allows carriers to utilize vital resources for more service-related areas. At the same time, Powell sought to strengthen the agency's enforcement by requesting authority from Congress to levy stiffer penalties on carriers that engage in anticompetitive behavior.

New FCC commissioners appointed by President Bush include Kathleen Q. Abernathy (R), Michael J. Copps (D) and Kevin J. Martin (R). Abernathy, sworn in on May 31, previously worked for CLEC and advanced services provider Broadband Office Inc. as director of government affairs. She also spent some time as a partner in a D.C. law firm, and served as vice president of regulatory affairs with baby bell U S West, now Qwest.

Copps, also sworn in on May 31, previously served in the U.S. Department of Commerce as deputy assistant secretary for trade development and deputy assistant secretary for basic industries. He served as chief of staff for Sen. Ernest Hollings of South Carolina, who supported rural issues in Congress.

Martin was sworn in on July 3. He previously served as an economic policy adviser to Bush and as counsel to the Bush campaign on telecom issues. Before the campaign, Martin served as legal adviser to then FCC Commissioner Harold Furchtgott-Roth.

Holdover Commissioner Gloria Tristani stepped down from her post in early September, and as of press time, her replacement had not yet been named.

FCC Active on Several Fronts

The FCC has remained busy throughout 2001. Significant actions by the agency included the adoption of an order on Internet service provider (ISP) reciprocal compensation. In its order, the commission reclassified ISP-bound traffic as "information access," defined by Section 251(g) of the 1996 Telecommunications Act. This definition effectively removed ISP-bound calls from local traffic subject to reciprocal compensation under Section 251(b)(5) of the act.

The commission determined that ISP-bound traffic was within its jurisdiction, thus giving the FCC authority to establish a compensation method and rates for ISP calls. The FCC considered "bill and keep" to be the most efficient recovery mechanism for ISP-bound traffic, and adopted a 36-month transition plan toward bill and keep. A "mirroring" provision required incumbent local exchange carriers (ILECs) that opt for the FCC's interim rates for ISP-bound traffic to charge the same rate for Section 251(b)(5) local traffic.

Five parties filed petitions for clarification and/or reconsideration of the order with the FCC. Three of the five petitioners raised serious concerns about the FCC overstepping its bounds and about the scope of the ISP proceeding to set rates for Section 251(b)(5) local traffic. One court challenge to the ruling was filed with the U.S. Court of Appeals for the D.C. Circuit.

Probably the most significant FCC action this year was the adoption of the Federal-State Joint Board's recommendation of the Rural Task Force's proposed reforms to the high-cost universal service mechanism for rural carriers. The RTF order established: 1) support based on historical cost, 2) a capped fund that allows for indexed growth by a rural growth factor (RGF), 3) "safety net" and "safety valve" provisions to allow upward adjustments in universal service support for carriers that meet network investment thresholds, and 4) disaggregation allowing carriers to divide support into two "cost zones" per wire center. Under this order, universal service will see an increase of about $1.26 billion over five years.

The final part of the universal service proposal is rural access reform. The Multi-Association Group (MAG) plan addressed separations, universal service and rate-of-return access charges. The commission issued separate rulings on separations in its freeze order, and on rural universal service in the RTF order.

The FCC on October 11 adopted an order and further notice of proposed rulemaking on the remaining issue of rate-of-return access charges in the MAG plan. As the commission had not released the full text of its order at press time, the specifics at this writing are not clear. However, in a press release, the FCC stated that the order raises the subscriber line charge (SLC) caps to a level comparable to the CALLS plan, reduces access charges and continues the rate-of-return at 11.25%.

The order also creates a new explicit universal service support mechanism, which eventually will replace the carrier common line (CCL) charge. The further notice seeks comment on the continued need for long-term support (LTS), the MAG incentive plan and other means of providing opportunities for rate-of-return carriers to increase their efficiency and competitiveness.

Courts Take a Stand

Two recent court decisions had a significant impact on how the FCC ruled on the MAG order. In its decision, Comsat v. FCC, the 5th U.S. Circuit Court of Appeals ruled that the "FCC cannot maintain any implicit subsidies whether on a permissive or mandatory basis," putting pressure on the FCC to remove all subsidies from access charges.

In August the 10th U.S. Circuit Court of Appeals issued a decision in Qwest v. FCC ruling that the commission did not provide sufficient reasoning for its 135% benchmark for high-cost universal service funding. The court found the FCC's definition of "reasonable and comparable" to be inadequate and ordered it to define the term more precisely The agency also was required to further define "sufficiency."

The 1996 Telecommunications Act requires that the FCC provide for "reasonable and comparable" rates between rural and urban areas and that federal funding be "sufficient" to achieve the goal of reasonable and comparable. The ruling also affirmed the use of proxy models for determining universal service support for large carriers and required the commission to create inducements for states to develop adequate state universal service programs.

The FCC also has taken action in areas not anticipated by the industry. In late April. the commission unexpectedly released a notice of proposed rulemaking (NPRM) seeking comment on a unified intercarrier compensation regime. The NPRM sought to explore replacing the current patchwork of intercarrier compensation schemes with a single bill and keep approach for both interstate and intrastate. The proceeding was intended to help the FCC develop a compensation regime to become effective in a post CALLS/MAG plan era.

Implementing Bill and Keep

The NPRM offered two proposed methods for implementation of bifi and keep: COBAK and BASICS. Under the FCC's bill and keep proposals, LECs would recover the costs for originating and terminating calls from their customers, instead of the current system, where a significant portion of these costs are recovered from interexchange carriers (IXCs), CLECs, wireless providers and other carriers.

For example, under the current calling parties network pays system, the originator of a long-distance call would pay one charge to their long-distance company which then would reimburse the originating and terminating ILEC for use of its network access. Under a bill and keep, each carrier would be required to bill its customer to cover the cost of access. For example, the originator of a long-distance call could receive a bill from their ILEC for originating the call and be billed a per-minute rate by their long distance carrier, while the call recipient could receive a bill from their ILEC for terminating the call.

NTCA and 68 other parties filed comments in response to the NPRM. Of the commenters, 62%, including NTCA, opposed or raised serious concerns about the FCC's proposed bill and keep regime. NTCA and other carriers urged the FCC not to rush into a new intercarrier compensation scheme until it had carefully thought through all the possible ramifications and settled many issues currently outstanding.

This year has been one of transition for the telecommunications industry and the FCC. While Wall Street analysts see no end in sight for faltering high-tech stocks, recent decisions by the FCC will begin to provide some regulatory certainty for the telecommunications industry. Decisions on rural universal service, separations, the CALLS plan reforming access charges for large carriers, and the recently adopted MAG plan reforming rural access charges will begin to settle the murky regulatory waters for carriers. However, adoption of these orders does not automatically instill stability.

But as the British theologian Richard Hooker once said, "Change is not made without inconvenience, even from worse to better."

Brian O'Hara is regulatory analyst for NTCA.

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Kathleen Q. Abernathy

Previously held positions as director of government affairs for Broadband Office Inc. and vice president of regulatory affairs for US WEST (now Qwest). Also had served as an adviser to former FCC Commissioners Sherry Marshall and James Quello. Abernathy was sworn in as commissioner May 31 and takes the seat vacated by former Commissioner Susan Ness.

Michael J. Copps

Prior to taking the commissioner seat, had served as deputy assistant secretary for trade development and deputy assistant secretary of commerce for basic industry at the US. Department of Commerce. Also had served as chief of staff to Sen. Ernest Hollings (D-S.C.). Copps was sworn in as commissioner May 31 and takes the seat of former Commissioner Harold Furchtgott-Roth.

Kevin J. Martin

Previously served as legal adviser to former FCC Commissioner Harold Furchlgott-Roth and as deputy chief counsel for George W. Bush's presidential campaign. Martin was sworn in as commissioner July 3, and takes the seat vacated by then Commissioner William Kennard (who later became chairman of the commission, a post now held by Michael Powell).